According to ratings agency Moody’s, companies such as Anglian Water, Thames Water, Yorkshire Water and Southern Water could suffer from a reduction in allowed returns.
Ofwat said it would issue further guidance in January 2014, particularly on the level of the weighted average cost of capital (WACC).
The regulator believes the range for the allowed return on the regulatory capital value (RCV) of wholesale activities as proposed by the companies – on average around 4.2-4.3 per cent for the 10 large water and sewerage companies – is too high and, according to the announcement, “not in alignment with market evidence for the water sector”.
Moody’s says this could a result in Ofwat reducing allowed returns below the levels proposed by companies for AMP6.
This, it said would be credit negative for the sector and result in downward rating pressure for companies which are already weakly positioned within their rating category.